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EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Lithium Technologies Inc.china10q123110ex311.htm
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EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Lithium Technologies Inc.china10q123110ex321.htm

Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q

o QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR

OR

x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

Commission File No: 000-53263

CHINA LITHIUM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)


NEVADA
41-1559888
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer ID No)

15 West 39th Street Suite 14B, New York, NY 10018
(Address of principal executive office) (Zip Code)

Registrant's telephone number: 212-391-2688


---------------------------------------------------------------------
Former name, former address and former fiscal year,
(if changed since last report)


              Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  
Yes o    No o




Table of Contents


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
(Do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

The number of shares of common stock, $0.001 par value per share, outstanding as of February 15, 2011 was 21,659,811.








PI SERVICES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED March 31, 2010

INDEX

 
TABLE OF CONTENTS
Page
     
PART I - FINANCIAL INFORMATION
 
   
Item 1: Financial Statements
1
   
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
23
   
Item 3: Quantitative and Qualitative Disclosures About Market Risk
28
   
Item 4: Controls and Procedures
28
   
 
PART II - OTHER INFORMATION
   
Item 1: Legal Proceedings
29
   
Item 1A: Risk Factors
29
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
29
   
Item 3: Defaults Upon Senior Securities
29
   
Item 4: Removed and Reserved
29
   
Item 5: Other Information
29
   
Item 6: Exhibits
29




Table of Contents

Item 1: Financial Statements


CHINA LITHIUM TECHNOLOGIES, INC

FOR THE PERIOD ENDED SEPTEMBER 30, 2010



 
PAGE
 
 
 
FINANCIAL STATEMENTS:
 
 
 
             BALANCE SHEETS
2 - 3
 
             STATEMENTS OF INCOME
4
 
             STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
5
 
             STATEMENTS OF CASH FLOWS
6 & 7
 
 
 
NOTES TO FINANCIAL STATEMENTS
8 - 21
 
 
 




- 1 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

BALANCE SHEETS


             ASSETS
(Unaudited)
December 31, 2010
 
June 30, 2010
 
 
         
Current Assets:              
             Cash and cash equivalents $
2,944,769
    $
2,761,427
 
             Accounts Receivable  
4,924,419
     
4,054,189
 
             Other Receivable  
57,127
     
48,621
 
             Advanced to suppliers  
22,449
     
12,297
 
             Inventory  
1,222,202
     
786,013
 
             Prepaid Expenses  
77,903
     
68,169
 
                                       Total Current Assets  
9,248,869
     
7,730,716
 
   
 
     
 
 
Plant & Equipment, net  
358,912
     
261,811
 
Patent and other intangibles, net  
71,966
     
72,907
 
               
                                       Total Assets  
9,679,747
     
8,065,434
 
               


"Continued on next page"


"The accompanying notes are an integral part of these financial statements"
- 2 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
December 31, 2010
 
June 30, 2010
   
 
         
Current Liabilities:              
              Accounts Payable  
1,437,184
     
1,832,512
 
             Advance from customers  
3,429
     
3,329
 
             Payroll payable  
64,854
     
57,186
 
             Tax Payable  
193,191
     
310,989
 
             Other Payable  
4,912
     
4,495
 
             Accrued expenses  
46,420
     
45,074
 
             Loan from shareholders  
133,407
     
83,492
 
             Warranty Accrual  
290,603
     
237,374
 
                                       Total Current Liabilities  
2,174,001
     
2,574,452
 
               
Long-Term Liabilities:              
             Long Term Loan  
-
     
-
 
                                       Total Long-Term Liabilities  
-
     
-
 
   
     
 
                                                    Total Liabilities  
2,174,001
     
2,574,452
 
   
 
     
 
 
Stockholders' Equity:  
     
 
             Preferred Stock, par value $0.001, 20,000,000 shares authorized,
                 0 share issued and outstanding as of June 30 and December 31, 2010
 
-
     
-
 
             Common Stock, par value $0.001, 783,000,000 shares authorized;
                 20,159,811 shares issued and outstanding as of June 30, 2010,
                 21,659,811 and 20,159,811 shares issued and outstanding, including
                 1,500,000 unvested restricted shares award as of December 31, 2010
 
21,659
     
20,159
 
             Additional Paid in Capital  
2,618,271
     
252,771
 
             Reserved Funds  
467,186
     
467,186
 
             Accumulated other comprehensive income  
300,563
     
98,594
 
             Retained Earnings  
5,557,681
     
4,652,272
 
             Less: Deferred Stock-based Compensation Expense  
(1,459,615
)    
-
 
                                       Total Stockholders' Equity  
7,505,745
     
5,490,982
 
   
     
 
                          Total Liabilities and Stockholders' Equity $
9,679,747
    $
8,065,434
 
               

"The accompanying notes are an integral part of these financial statements"
- 3 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)


 
Three Months Ended
December 31,
     
Six Months Ended
December 31,
 
 
2010
     
2009
     
2010
     
2009
 
Revenues $
4,268,090
    $
3,505,473
    $
7,972,767
    $
7,428,519
 
Cost of Goods Sold  
2,766,523
     
2,294,508
     
5,167,177
     
5,214,539
 
   
     
     
     
 
Gross Profit  
1,501,566
     
1,210,965
     
2,805,590
     
2,213,980
 
   
     
     
     
 
Operating Expenses:                              
       Manufacturing Expenses $
54,350
    $
66,356
    $
116,835
    $
93,257
 
       R & D Expenses  
19,675
     
20,615
     
39,995
     
31,330
 
       Sales Expenses  
134,882
     
68,843
     
384,736
     
134,543
 
       General and Administrative Expenses  
203,226
     
150,887
     
1,048,605
     
280,404
 
   
     
     
     
 
              Total Operating Expenses  
412,133
     
306,701
     
1,590,171
     
539,535
 
   
     
     
     
 
Income from Operations before other Income and (expenses)  
1,089,434
     
904,264
     
1,215,419
     
1,674,446
 
Other (Expense) and Income:  
     
     
     
 
       Financial Expenses  
(8,127
)    
-
     
(11,631
)    
229
 
       Other (Expenses) Income  
(771
)    
(53
)    
(590
)    
(1,252
)
              Total Other Income and (Expense)  
(8,898
)    
(53
)    
(12,220
)    
(1,023
)
   
     
     
     
 
Income Before Income Taxes  
1,098,332
     
904,317
     
1,227,639
     
1,675,469
 
   
     
     
     
 
Provision For Income Taxes  
285,431
     
226,718
     
322,230
     
419,506
 
   
     
     
     
 
Net Income  
812,900
     
677,599
     
905,410
     
1,255,963
 
   
     
     
     
 
Other Comprehensive Income:  
     
     
     
 
       Unrealized Gain (loss) on Foreign Currency Translation  
103,284
     
139
     
201,969
     
35,562
 
Comprehensive Income $
916,184
    $
677,739
    $
1,107,378
    $
1,291,525
 
                               
Earnings Per Common Share:                              
Basic  
0.04
     
0.03
     
0.08
     
0.06
 
                               
Diluted  
0.04
     
0.03
     
0.04
     
0.06
 
                               
Weighted Average Common Shares:                              
Basic  
20,159,811
     
20,159,811
     
20,159,811
     
20,159,811
 
                               
Diluted  
21,359,811
     
20,159,811
     
20,759,811
     
20,159,811
 
                               

"The accompanying notes are an integral part of these financial statements"
- 4 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

DECEMBER 31, 2010
(UNAUDITED)

Preferred Stock
 
Common Stock
   
Additional
   
Accumulated
Other
                       
Total
                       
Paid in
   
Comprehensive
   
Retained
     
Reserved
   
Comprehensive
   
Stockholders'
 
Shares
   
Amount
 
Shares
   
Amount
   
Capital
   
Income
   
Earnings
     
Funds
   
Income
   
Equity
Balance- June 30, 2008
-
 
$
-
 
-
 
$
0
 
$
0
   
$
63,394
 
$
967,804
   
$
-
 
$
-
 
$
1,031,198
 
Issuance of common stock
-
   
-
 
1,007,936
   
1,008
   
157,436
     
-
   
-
     
-
   
-
   
158,444
 
Net income for the year
-
   
-
 
-
   
-
   
-
     
-
   
1,722,687
     
-
   
1,722,687
   
1,722,687
 
Foreign currency adjustment
-
   
-
 
-
   
-
   
-
     
7,993
   
-
     
-
   
7,993
   
7,993
 
Comprehensive income
-
   
-
 
-
   
-
   
-
     
-
   
-
     
-
   
1,730,680
   
-
 
Balance - June 30, 2009
-
 
$
-
 
1,007,936
   
1,008
   
157,436
     
71,387
   
2,690,491
   
$
-
   
 
   
2,920,322
 
                                                             
Issue of common stock
-
   
-
 
19,151,875
   
19,151
   
95,335
     
-
   
-
     
-
   
-
   
114,486
 
Net income for the year
-
   
-
 
-
   
-
   
-
     
-
   
2,428,966
     
   
2,428,966
   
2,428,966
 
Retained earning to
reserved funds
-
   
-
 
-
   
-
   
-
     
-
   
(467,186
)    
467,186
   
-
   
-
 
Foreign currency adjustment
-
   
-
 
-
   
-
   
-
     
27,207
   
-
     
-
   
27,207
   
27,207
 
Comprehensive Income
-
   
-
 
-
   
-
   
-
     
-
   
-
     
-
   
2,456,173
   
-
 
Balance - June 30, 2010
-
 
$
-
 
20,159,811
   
20,159
   
252,771
     
98,594
   
4,652,271
   
$
467,186
   
 
   
5,490,982
 
                                                             
Common stock
compensation on
September 2, 2010
-
   
-
 
-
   
-
   
717,000
     
-
   
-
     
-
   
-
   
717,000
 
Restricted common stock
issued to employees
-
   
-
 
1,500,000
   
1,500
   
1,648,500
     
-
   
-
     
-
   
-
   
1,650,000
 
Deferred stock-based
compensation expense
-
   
-
 
-
   
-
   
(1,459,615
)    
-
   
-
     
-
   
-
   
(1,459,615
)
Net income for the
six months
-
   
-
 
-
   
-
   
-
     
-
   
905,410
     
-
   
905,410
   
905,410
 
Foreign currency
translation gain
-
   
-
 
-
   
-
   
-
     
201,969
   
-
     
-
   
201,969
   
201,969
 
Comprehensive Income
-
   
-
 
-
   
-
   
-
     
-
   
-
     
-
   
1,107,378
   
-
 
Balance - December 31, 2010
-
 
$
-
 
21,659,811
 
$
21,659
 
$
1,158,656
   
$
300,563
 
$
5,557,681
   
$
467,186
     
$
7,505,745
 
                                                             

"The accompanying notes are an integral part of these financial statements"
- 5 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

FOR SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)



 
Six Months Ended
December 31
 
Cash Flows From Operating Activities:  
2010
     
2009
 
               
Net Income $
905,410
    $
1,255,963
 
Adjustments To Reconcile Net Income To Net Cash  
     
 
       Provided (Used) By Operating Activities:  
     
 
       Depreciation and Amortization Expense  
42,264
     
41,934
 
       Stock-based Compensation Expense  
717,000
     
-
 
       Amortization of Stock-based Compensation Expense  
190,385
     
-
 
(Increase) or Decrease in Current Assets:  
     
 
       Accounts Receivable  
(870,229
)    
(1,816,698
)
       Inventories  
(436,189
)    
1,272,912
 
       Prepaid Expenses  
(9,734
)    
33,266
 
       Advanced to Suppliers  
(10,152
)    
(12,066
)
       Other Accounts Receivables  
(8,506
)    
(22,250
)
Increase or (Decrease) in Current Liabilities:  
     
 
       Accounts Payable  
(395,327
)    
121,892
 
       Advance from customers  
99
     
(1,110
)
       Taxes Payable  
(117,798
)    
115,292
 
       Payroll payable  
7,668
     
18,792
 
       Interest Payable  
-
     
(32,732
)
       Warranty Accrual  
53,229
     
33,079
 
       Other Account Payable  
417
     
(117,217
)
       Accrued Expenses and Other Payables  
1,346
     
41
 
   
     
 
                     Net Cash (Used) Provided by Operating Activities  
69,882
     
891,097
 
   
     
 
Cash Flows From Investing Activities:  
     
 
Purchases of Property and Equipment  
(126,835
)    
(184,000
)
Purchases of Intangible Assets  
(2,119
)    
631
 
   
     
 
                     Net Cash (Used) Provided in Investing Activities  
(128,954
)    
(183,369
)

"Continued on next page"


"The accompanying notes are an integral part of these financial statements"
- 6 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

FOR SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED
)



 
Six Months Ended
December 31
 
Cash Flows From Financing Activities:  
2010
     
2009
 
               
Loan from and (Repayment) to Shareholder  
49,915
     
(381,334
)
Capital Contribution  
-
     
114,486
 
   
     
 
                     Net Cash (Used) Provided by Financing Activities  
49,915
     
(266,848
)
   
     
 
Effect of exchange rate changes on cash and cash equivalents  
192,499
     
47,798
 
   
     
 
Increase in Cash and Cash Equivalents  
183,342
     
488,679
 
   
     
 
Cash and Cash Equivalents -Beginning Balance  
2,761,427
     
407,333
 
               
Cash and Cash Equivalents - Ending Balance $
2,944,769
    $
896,012
 
               
Supplemental Disclosures of Cash Flow Information:              
               
Cash Paid During The Years for:              
                     Interest Expense $
-
    $
32,776
 
               
                     Income Taxes $
462,618
    $
423,628
 
               
Non-Cash Investing and Financing Activities:              
                     Common stock transferred for stock-based compensation $
717,000
    $
-
 
               
                     Issued 1,500,000 restricted common stock to employees $
1,650,000
    $
-
 
               


"The accompanying notes are an integral part of these financial statements"
- 7 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The Company was incorporated as Sweet Little Deal, Inc. in 1986 under the laws of the State of Minnesota. On October 10, 1991, the Company changed its name to Physicians Insurance Services, Ltd. On July 23, 2008, the Company held a shareholder meeting approving a migratory merger to Nevada and changed its name to PI Services, Inc., which became effective January 12, 2009. On June 2, 2010, PI Services, Inc. changed its name to China Lithium Technologies, Inc. (the "Company") to reflect the reverse merger of Sky Achieve Holdings, Inc. ("Sky Achieve") into the Company.

On March 19, 2010 the Company acquired all of the outstanding capital stock of Sky Achieve, a British Virgin Islands limited liability corporation registered in November, 2009 (the "Share Exchange"). Pursuant to ASC 805-10-55-12 et seq., Sky Achieve is deemed to be the acquirer in the Share Exchange, as the prior owner of Sky Achieve obtained the largest portion of the voting rights in the combined entity, and the assets and earnings of Sky Achieve substantially exceeded those of PI Services. The effect of the Share Exchange is such that a reorganization of the entities has occurred for accounting purposes and is deemed to be a reverse merge recapitalization of Sky Achieve. The financial statements presented in this report are those of Sky Achieve and its subsidiaries, including their VIEs, as if the Share Exchange had been in effect retroactively for all periods presented.

Sky Achieve was organized on November 5, 2009 under the laws of British Virgin Islands. It had no business activity from its inception until January 5, 2010. On January 5, 2010, Sky Achieve obtained control over the business of Beijing Guoqiang Science and Technology Development Co., Ltd ("Beijing Guoqiang") by entering into five agreements with and the equity owners of Beijing Guoqiang. The agreements are designed to transfer to Sky Achieve all of the responsibilities for management of the operations of Beijing Guoqiang, as well as all of the benefits and all of the risks that arise from the operations of Beijing Guoqiang. The relationship is purely contractual, however, so the rights and responsibilities of Sky Achieve with respect to Beijing Guoqiang are ultimately dependent on the willingness of the courts of the PRC to enforce the agreements. For accounting purposes, Beijing Guoqiang is deemed to be a variable interest entity with respect to Sky Achieve, and its balance sheet accounts and financial results are consolidated with the accounts and results of Sky Achieve for financial reporting purposes.

The Company issued 19,151,875 shares of its common stock to the shareholders of Sky Achieve. Those shares represented 95 % of the outstanding shares of the Company. Mr. Kun Liu, the Chairman of Beijing Guoqiang purchased additional 1% of the outstanding shares of the Company simultaneously with the share exchange. As a result of these transactions, persons associated with Beijing Guoqiang owned securities that represented 96% of the equity in the Company as of the completion of the Share Exchange.

Beijing Guoqiang designs, manufacturers and markets Polymer Lithium-ion Battery Modules, Lithium-ion Battery Chargers, Lithium-ion Battery Management Systems as well as other Lithium-ion Battery Management Devices essential to proper power utilization ("PLI Battery Products"). During December of 2009, the Company set up two manufacturing facilities in Hangzhou and Guangzhou to produce power and battery charger.

- 8 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION (continued)

Reverse stock split
On June2, 2010, the Company implemented a 1-for 2.2 reverse split of its common stock. All enumerations herein of numbers of common shares or per share amounts have been adjusted as needed to give retroactive effect to the reverse stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying financial statements include China Lithium Technologies, Inc. and its wholly owned subsidiaries, Sky Achieve Holdings, Inc., as well as its variable interest entity, Beijing Guoqiang Global Science and Technology Development Co, Ltd. All significant inter-company transactions and balances have been eliminated in the consolidation.

Variable Interest Entity

The accounts of Beijing Guoqiang have been consolidated with the accounts of the Company because Beijing Guoqiang is a variable interest entity with respect to Sky Achieve, which is a wholly-owned subsidiary of the Company. Sky Achieve is party to five agreements dated January 5, 2010 with the owners of the registered equity of Beijing Guoqiang and with Beijing Guoqiang. The agreements transfer to Sky Achieve all of the benefits and all of the risk arising from the operations of Beijing Guoqiang, as well as complete managerial authority over the operations of Beijing Guoqiang. Sky Achieve is the guarantor of all of the obligations of Beijing Guoqiang. By reason of the relationship describe in these agreements, Beijing Guoqiang is a variable interest entity with respect to Sky Achieve because the following characteristics in ASC 810-10-15-14 are present:

  •  The holders of the equity investment in Beijing Guoqiang lack the direct or indirect ability to make decisions about the entity's activities that have a significant effect on the success of Beijing Guoqiang, having assigned their voting rights and all managerial authority to Sky Achieve. (ASC 810-10-15-14(b)(1)).

•  The holders of the equity investment in Beijing Guoqiang lack the obligation to absorb the expected losses of Beijing Guoqiang, having assigned to Sky Achieve all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2)).

•  The holders of the equity investment in Beijing Guoqiang lack the right to receive the expected residual returns of Beijing Guoqiang, having granted to Sky Achieve all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).

Because the relationship between Beijing Guoqiang and Sky Achieve is entirely contractual, the Company's interest in Beijing Guoqiang depends on the enforceability of those agreements under the laws of the PRC. We are not aware of any judicial decision as to the enforceability of similar agreements under PRC law.


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported total assets, liabilities, stockholders' equity or net income.

Cash and cash equivalent
For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Trade accounts receivable

Trade accounts receivable are stated at net realizable value, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is established based on the management's assessment of the recoverability of accounts and other receivables.

The Company determines the allowance based on historical write-off experience, customer specific facts and current crisis on economic conditions. Bad debt expense is included in the general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories
Inventories are initially stated at the level of the original cost. The cost of inventories is determined using first-in first-out cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, cost includes an appropriate share of production overhead based on normal operating capacity.

The Company regularly reviews the cost of inventories against their estimated fair market value and records a lower of cost or market write-down for inventories that have cost in excess of estimated market value.

Advances to suppliers
The Company makes advances to certain vendors for inventory purchases. The advances to suppliers were $22,449 and $12,297 as of December 31, 2010 and June 30, 2010 respectively.

Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Plant and equipments are depreciated using the straight-line method over 3-5 years estimated useful lives

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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Leasehold improvements are amortized using the straight-line method over the term of the leases or the estimated useful lives, whichever is shorter.

Construction in progress
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use. The values of construction in progress were $0 and $0 as of December 31, 2010 and June 30, 2010 respectively.

Impairment of Long-lived assets
The Company accounts for long-lived assets in accordance with ASC 360 "Accounting for the Impairment of Disposal of Long-Lived Assets", which became effective January 1, 2002. Under ASC 360, the Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company has not incurred any losses in connection with the adoption of this statement.

Revenue recognition
The Company recognizes revenue on product sales when each of the following conditions has been satisfied:

  •  Persuasive evidence of a sales arrangement exists in the form of a written contract or an order and acknowledge.

•  The sales price has been fixed and made determinable by sales contract and/or invoice.

•  The product has been delivered to the customer's warehouse - unless other terms for delivery have been specified in the contract - at which time the customer takes ownership and the risk of loss passes to the customers.

•  Payment has been received or the Company determines that collection of the related receivable is probable. Probability of collection is determined based on recurrent visits by the Company's sales staff and accounting staff to the customer's premises to assess the health of the customer's business.

•  The 15 day right of return that we afford to customers has expired.

Net sales of products represent the invoiced value of goods, net of Value Added Taxes ("VAT"), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

for export sales. Our standard contract allows customers, within 15 days after delivery, to return for cash or exchange products with which they are not satisfied. Shipping charges on the return are allocated between the customer and the Company based on relative fault. We do not recognize revenue until the 15 day right of return has expired. After the 15 days has expired, the Company provides customers with no additional post-delivery rights, except as set forth in its product warrant. We record a provision for warranty claims, which is based on historical warranty claims data and represents the Company's best estimate of warranty claims it will experience.

Cost of goods sold

Cost of goods sold consists primarily of material, and related expenses, which are directly attributable to the production of products. The Company presents cost of goods sold and manufacturing expenses separately in the income statement.

Use of estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and valuation allowances for receivables. Actual results could differ from those estimates.

Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of December 31, 2010 and June 30, 2010, substantially all of the Company's cash and cash equivalents were held by major banks located in the PRC which the Company's management believes to be high credit quality banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer's financial condition and customer payment practices to minimize collection risk on accounts receivable.

Foreign currency translation

The functional currency of Beijing Guoqiang is Chinese Renminbi ("RMB"). For financial reporting purposes, RMB has been translated into United States Dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates, and income and expenses items are translated using the average rate for the period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income." Gains and losses resulting from foreign currency translation are included in accumulated other comprehensive income.


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People's Bank of China (the "PBOC") or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Translation of amounts from RMB into US dollar has been made at the following exchange rates for the respective years:

December 31, 2010  
Balance sheet RMB 6.5920 to US $1.00
Statement of income and other comprehensive income RMB 6.6489 to US $1.00
   
June 30, 2010  
Balance sheet RMB 6.7889 to US $1.00
Statement of income and other comprehensive income RMB 6.8180 to US $1.00

Income taxes
The Company accounts for income tax under the provisions of SFAS No.109 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or the entire deferred tax asset will not be realized. There are no deferred tax amounts at December 31, 2010.

Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, other receivables, accounts payable, accrued expenses, taxes payable, payroll and other loans payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Intangible assets
Intangible assets mainly consist of patents. Patents have being amortized using the straight-line method over the 10 years. Other intangible assets have being amortized using the straight-line method over the 5 years. The Company also evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Comprehensive income

Comprehensive income is defined to include changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.

Statement of cash flows
In accordance with Accounting Standards Codification, ASC 230, "Statement of Cash Flows," cash flows from the Company's operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Reserved Funds
Until June 20, 2006, entities organized in the PRC were required to transfer 15% of their profit after taxation, as determined in accordance with Chinese accounting standards and regulations, to the surplus reserve fund. Subject to certain restrictions set out in the Chinese Companies Law, the surplus reserve fund may be distributed to stockholders in the form of share bonus issues and/or cash dividends. After June 30, 2006, such reserve is no longer mandatory under the Chinese Law. However the Company from time to time allocates funds to its reserve fund for its future development.

Stock-Based compensation
The Company adopted the provisions of ASC 718, "stock compensation," which establishes the accounting for employee stock-based awards. Under the ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (i.e. the vesting period of the grant). The fair value of shares granted is deemed to be the closing traded price of our common stock on the date of grant.

Generally shares issued to employees will be vested over a requisite service period. These shares will be amortized over the vesting period in accordance with ASC 718. The average vesting period for the shares issued to date has been 5.00 years, based on the terms of the employment agreements under which the stock was awarded. The stock-based compensation was $817,385 and $0 for the three months and six months, ended December 31, 2010 and 2009, respectively.

Recently issued accounting standards
In January 2010, FASB issued ASU No. 2010-06 - Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales,

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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-02 - Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51." If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.



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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

3. INVENTORIES

The components of inventories at December 31, 2010 and June 30, 2010 are as follows:

 
December 31,
2010
     
June 30, 2010
   
Raw Materials $
461,742
    $
$ 440,027
   
Work in Process  
358,995
     
90,428
   
Finished Goods  
399,683
     
253,827
   
Low Value Items  
1,783
     
1,731
   
Total $
1,222,202
    $
786,013
   

As of December 31, 2010 and June 30, 2010, the Company has not recorded any reserve for inventory obsolescence.

4. PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2010 and June 30, 2010 are as follows:


 
December 31,
2010
     
June 30, 2010
   
Building and Improvement $
134,129
    $
41,859
   
Machinery and Equipment  
352,138
     
307,249
   
Motor Vehicle  
30,443
     
29,460
   
Less: Accumulated Depreciation  
(157,799
)    
(116,757
)  
Total Property and Equipment, net $
358,912
    $
261,811
   
                 


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

4. PROPERTY AND EQUIPMENT (continued)


Depreciation expenses for the six months ended December 31, 2010 and December 31, 2009 were $37,113 and $36,806 respectively.

5. PATENT AND OTHER INTANGIBLES

The net book value of intangible assets as of December 31, 2010 and June 30, 2010 was comprised of the following:

 
December 31, 2010
     
June 30, 2010
 
               
Intangible Assets $
112,026
    $
106,719
 
Less: Accumulated Amortization  
(40,060
)    
(33,811
)
Total Intangible Assets, net $
71,966
    $
72,907
 
               
Amortization expenses for the six months ended December 31, 2010 and 2009 were $5,151 and $5,128 respectively.

Based upon current assumptions, the Company expects that its intangible assets will be amortized according to the following schedule:

Balance at June 30,
   
Amount
         
2011
  $
10,733
         
2012
   
10,733
         
2013
   
10,733
         
2014
   
10,733
         
2015
   
10,733
         
Total 5 years   $
53,665
         
                 
6. ACCOUNTS RECEIVABLE

Accounts receivable is uncollateralized, non-interest bearing customer obligations typically due under terms requiring payment from the invoice date. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice or, if unspecified, are applied to the oldest unpaid invoices. As December 31, 2010 and June 30, 2010, accounts receivable and allowance for doubtful account as follow:

 
December 31, 2010
     
June 30, 2010
 
               
Accounts Receivable $
4,924,419
    $
4,201,211
 
Less: Allowance for Doubtful Accounts  
-
     
(147,022
)
Total Accounts Receivable, net $
4,924,419
    $
4,054,189
 
               

- 17 -


Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

7. ACCOUNTS PAYABLE


The Company has accounts payable related to the purchase of inventory. The amount of $1,437,184 and $1,832,512 as of December 31, 2010 and June 30, 2010 respectively, represent the accounts payable by the Company to the suppliers.

8. ACCRUED EXPENSES


Accrued expenses consist of audit fee and the payroll taxes for the current year. As of December 31, 2010 and June 30, 2010, the balance was $46,420 and 45,074, respectively.

9. WARRANTY ACCRUAL


The Company provides its customers a 2 years warranty on all products sold. In anticipation of warranty repairs, the Company accrues 1% of the sales amount as a "Warranty Accrual." The Company believes that the accrual is adequate based on its historical warranty experience. If the goods sold have no quality problems within 2 years, the Company reverses the warranty accrual. As of December 31, 2010 and June 30, 2010, the warranty accrual was $290,603 and $237,374 respectively.

During the six months ended December 31, 2010, the Company incurred $6,168 in warranty claims and accrued $51,750 as a warranty accrual on account of sales in that period.

10. STOCK-BASED COMPENSATION


The Company adopted the 2010 Stock Award Plan (the "2010 Plan") on October 6, 2010. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of the participants of the Plan (the "Participants") to those of the Company's stockholders, and by providing the Participants with an incentive for outstanding performance. The Company has reserved 3,000,000 shares of common share for the options and awards under the Plan.

Subject to the terms and provisions of the 2010 Plan, the Board of Directors, at any time and from time to time, may grant shares of stock to eligible persons in such amounts and upon such terms and conditions as the Board of Directors shall determine.

The Board of Directors shall have the authority to determine all matters relating to the stock to be granted under the 2010 Plan, including selection of the individuals to be granted awards, the number of share, the date of termination of the stock awards, vesting schedules and all other terms and conditions thereof.

The Company has issued 1,500,000 shares provided in the Plan in the form of grants of restricted common stock on October 14, 2010, valued by using our closing stock price of $1.10 on that date. As of December 31, 2010, none of those shares had vested and no share had been cancelled. A summary of the status of the Company's unearned stock compensation under the 2010 Plan as of December 31, 2010, and changes for the period ended December 31, 2010, is presented below:



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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)

10. STOCK-BASED COMPENSATION (continued)


Unearned Stock Compensation as of October 18, 2010
  $
1,650,000
         
Unearned Stock Compensation Granted
   
-
         
Amortization of Unearned Stock Compensation
   
(190,385
)        
Unearned Stock Compensation as of December 31, 2010   $
1,459,615
         
                 
11. INCOME TAXES

In accordance with the relevant tax laws and regulations of PRC, Beijing Guoqiang is subject to income tax at an effective rate of 25% from January 1, 2008 on income reported in the statutory financial statements after appropriated tax adjustments. Because there is no income tax in the British Virgin Islands, Sky Achieve is not subject to taxation in its domicile.

The following table sets forth the components of the Company's income before income tax expense and the components of income tax expense for the periods ended December 31, 2010 and June 30, 2010:

 
December 31, 2010
     
June 30, 2010
 
               
China Pre-tax Income $
1,227,639
    $
3,266,452
 
Domestic Pre-tax Income  
-
     
-
 
Total Pre-tax Income $
1,227,639
    $
3,266,452
 
               
 
December 31, 2010
     
June 30, 2010
 
               
China Income Tax Expense $
322,230
    $
837,486
 
Domestic Income Tax Expense  
-
     
-
 
Total Current Income Tax Expense $
322,230
    $
837,486
 
               
A reconciliation of tax at United States federal statutory rate to provision for income tax recorded in the financial statements is as follows:


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)


11. INCOME TAXES (continued)


 
December 31, 2010
     
June 30, 2010
 
U.S. Statutory Income Tax Rate  
35.0%
     
35.0%
 
Foreign Income not Recognized in the U.S.  
(35.0%)
     
(35.0%)
 
China Statutory Income Tax Rate  
25.0%
     
25.0%
 
Other Items (a)  
1.25%
     
0.64%
 
Effective Consolidated Current Income Tax rate  
26.25%
     
25.64%
 
               
(a) The 1.25% and 0.64% represent $43,394 and $83,492 of corporate expenses incurred by the Company's US office that are not subject to PRC income tax for the six months ended December 31, 2010 and year ended June 30, 2010.

12. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS


The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The future profitability of the Company is dependent upon the Company's abilities to secure service contracts and maintain the operating expense at a competitive level.

Concentration of credit risk
Financial instruments that potentially subject to significant concentrations of credit risk consist of cash and cash equivalents. As of December 31, 2010 and June 30, 2010, substantially all of the Company's cash and cash equivalents were held by major banks which are located in the PRC. The Company's management believes that there are remote chances the Company will loss money on those banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer's financial condition and customer payment practices to minimize collection risk on account receivables.


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Table of Contents

CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)


12. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (continued)


The major customers which represented more than 5% of Accounts Receivable as follows:

 
December 31, 2010
June 30, 2010
 
Customer Name
Amount
%
Amount
%
 
Beijing Anhualianhe Co., Ltd
217,007
4.41%
275,539
6.56%
 
Beijing Renxinyu Trading Co., Ltd
308,285
6.26%
474,070
11.28%
 
Yangguangsanwei Electronic Appliance Co., Ltd
167,386
3.40%
258,880
6.16%
 
Beijing Ziqiangfa Technology Co., Ltd
75,213
1.53%
256,231
6.10%
 
Beijing Jiruiyueda Electronic Facility Co., Ltd
-
0.00%
349,617
8.32%
 
Guangzhou Chuangxin Power Technology Co., Ltd
132,173
2.68%
413,795
9.85%
 
Saiensi Resource Co., Ltd
324,911
6.60%
149,554
3.56%
 
Shandong Motor Way Fujian Branch
665,220
13.51%
-
0.00%
 


The major vendors which represented more than 5% of Accounts Payable as follows:

 
December 31, 2010
June 30, 2010
 
Vendor Name
Amount
%
Amount
%
 
Heilongjiang Zhongqiang Power Tech Ltd
885,176
61.59%
1,593,055
86.93%
 
Guangzhou Fanyubaiyun Electronic Co., Ltd
101,519
7.06%
98,574
5.38%
 

The major customers which represented more than 5% of the total sales for the six months ended December 31, 2010:

 
Six months ended December 31, 2010
 
Customer Name
Amount
%
 
Beijing Renyuxin Trading Co., Ltd
409,403
5.15%
 
Shandong Motor Way Fujian Branch
714,812
8.99%
 

The major vendors which represented more than 5% of the total purchases for the six months ended December 31, 2010:

 
Six months ended December 31, 2010
 
Vendor Name
Amount
%
 
Heilongjiang Zhongqiang Power Tech Co., Ltd
2,764,246
51.37%
 
Beijing Anhualianhe Power Tech Co., Ltd
1,627,262
30.24%
 
Guangzhou Fanyubaiyun Electronic Co., Ltd
312,088
5.80%
 


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CHINA LITHIUM TECHNOLOGIES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2010
(UNAUDITED)


13. RELATED PARTY TRANSACTIONS

A significant portion of the Company's raw materials were purchased from Heilongjiang Zhongqiang Power Tech Co., Ltd (Heilongjiang ZQPT), which is a subsidiary of Advanced Battery Technology Group (ABAT). One of our Company's directors, Mr. Qiang Fu, is the immediate family member of the CEO of ABAT, who has exclusive control over the business of Heilongjiang ZQPT. In the three-month period ended December 31, 2010, purchase from Heilongjiang ZQPT was $1,410,662, or 44.57% of the total purchase for the three-month period. In the six-month period ended December 31, 2010, purchase from Heilongjiang ZQPT was $2,764,246, or 51.37% of the total purchase for the six-month period. As of December 31, 2010, total amount due to Heilongjiang ZQPT was $885,176, or 61.59% of the total accounts payable.

As of June 30, 2010, total amount due to Heilongjiang ZQPT was $1,593,055, or 86.93% of the total accounts payable. As of June 30, 2010, there are two supply contacts outstanding between the Company and Heilongjiang ZQPT, one dated February 24, 2010 and the other dated March 22, 2010. The February 24 contact contains the parties' agreement to purchase and sell 3000 units of a specified 72 volt battery for 27,000 RMB per unit. Delivery will be scheduled by Beijing Guoqiang by notice not less than 25 days before delivery. Heilongjiang ZQPT shall pay transportation costs. Title transfers ex factory, and national testing standards will apply. The March 22 contract has identical terms, but contemplates the purchase and sale of 60,000 units of a 3.2 volt battery at 105 RMB per unit.

14. RESTATEMENT

The Statement of Changes in Stockholders' Equity included in this Report has been restated and differs from the Statement of Changes in Stockholders' Equity included in the Company's Annual Report on Form 10-K for the year ended June 30, 2010. The restatement was made because the Statement included in the Form 10-K failed to properly account for the reverse merger of Sky Achieve into the Company on March 19, 2010. In the restated Statement of Changes in Stockholders' Equity, the stockholders' equity of the Company has been retroactively restated for the equivalent number of shares issued to the shareholders of Sky Achieve, with an adjustment to paid-in capital for the difference in par value. Similarly, shares outstanding and earnings per share have also been retroactively restated based on the equivalent number of shares issued to the shareholders of Sky Achieve.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis should be read in conjunction with the company's Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q as well as the company's other SEC filings, including our annual report on Form 10-K for the year ended June 30, 2010.


Forward Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

OVERVIEW

We are a holding company incorporated in the State of Nevada. Our wholly-owned subsidiary is the beneficiary of an entity in China that designs, manufactures and markets polymer lithium-ion battery safety systems, modules of batteries, lithium-ion battery chargers and power supplies, as well as other lithium-ion battery management devices essential to proper power utilization ("PLI Battery Products").


Acquisition of Achieve

              On March 19, 2010, the Company acquired all of the outstanding capital stock of Sky Achieve, a company organized under the laws of British Virgin Islands on November 5, 2009. Sky Achieve had no business activity from its inception until January 5, 2010. On January 5, 2010, Sky Achieve obtained control over the business of Beijing GuoQiang Global Science & Technology Development Co., Ltd, a PRC limited liability company ("Beijing Guoqiang"). Pursuant to the Variable Interest Agreements ("VIE Agreements") with Beijing Guoqiang and its shareholder, each of which has a term of ten years, Sky Achieve provides consulting and management services to Beijing Guoqiang, has exclusive control over Beijing GuoQiang's daily operations and financial affairs, appoints its senior executives, and approves all matters requiring shareholder approval. As a result of these contractual arrangements, the Company is the beneficiary of all of the assets and is responsible for all of the liabilities of Beijing Guoqiang. Accordingly, we have consolidated Beijing Guoqiang's financial results, assets and liabilities in our financial statements since the execution of the VIE Agreements.

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Change of Name and Reverse Split


Effective on June 2, 2010, we changed our name to China Lithium Technologies, Inc. and effectuated a reverse split of our common stock in the ratio of 1:2.2 (the "Reverse Split").

RESULTS OF OPERATIONS

              Our revenue during the three months ended December 31, 2010 was $4,268,090, an increase of $762,617 or 22% from the revenue we reported for the three months ended December 31, 2009. Revenue during the six months ended December 31, 2010 was $7,972,767, an increase of 7% from the six months ended December 31, 2009 The increase in our revenue during the three and six months was primarily due to our success in attracting new customers. During the six months ended December 31, 2010, $725,090 in revenue arose from sales to customers who had made no prior purchases. In addition, sales growth resulted from our success in refocusing our marketing on higher margin products, specifically replacing sales of low margin battery packs with sales of higher margin power supplies and battery chargers along with increased sales of our battery modules. This reorientation of our sales is evident in the following breakdown of per-product line revenues:

 
3 months
ended
Dec 31,2010
     
3 months
ended
Dec 31,2009
     
Change
     
Percentage
 
Battery Safety System  
2,166,819
     
2,287,373
     
(120,554)
     
  -5.27%
 
Battery Module  
937,549
     
274,638
     
662,911
     
241.38%
 
Battery Pack  
40,106
     
293,341
     
(253,235)
     
 -86.33%
 
Electric Vehicle Battery  
570,229
     
267,379
     
302,850
     
113.27%
 
Power  
461,377
     
373,446
     
87,931
     
  23.55%
 
Chargers  
92,021
     
9,297
     
82,724
     
889.84%
 
Total Revenue  
4,268,090
     
3,505,473
     
762,617
     
  21.76%
 
                               
 
6 months
ended
Dec 31,2010
     
6 months
ended
Dec 31,2009
     
Change
     
Percentage
 
Battery Safety System  
4,283,592
     
4,596,704
     
(313,112)
     
  -6.81%
 
Battery Module  
1,781,760
     
376,225
     
1,405,534
     
373.59%
 
Battery Pack  
104,845
     
1,297,454
     
(1,192,609)
     
  -91.92%
 
Electric Vehicle Battery  
837,992
     
789,297
     
48,695
     
6.17%
 
Power  
787,559
     
359,880
     
427,679
     
  118.84%
 
Chargers  
177,019
     
8,959
     
168,060
     
1875.89%
 
Total Revenue  
7,972,767
     
7,428,519
     
544,248
     
7.33%
 
                               

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              There was no significant change in the efficiency of our manufacturing operations from the second quarter of fiscal year 2010 to the second quarter of fiscal year 2011. Our gross margin in each period was approximately 35%. Accordingly, our gross profit increased in proportion to the increase in our revenue from period to period. The comparison of six month periods showed an improvement, however, as we achieved a 35% gross margin in the six months ended December 31, 2010 and only a 30% gross margin in the six months ended December 31, 2009. The improvement was primarily attributable to the fact that in the later part of fiscal year 2010 we reoriented our sales effort to reduce the sales of battery packs, which had a margin of 10%, and increase the sales of power supplies (49% profit margin) and battery chargers (25% profit margin).

              Our operating expenses increased significantly in both the three and six month periods ended December 31, 2010. During the three months ended December 31, 2010, the primary increase was in sales expenses, which increased by 96% ($66,039). Sales expenses also increased in the six months ended December 31, 2010, growing 186% ($250,193) over sales expenses in the six months ended December 31, 2009. The primary reason for these sharp increases has been our efforts to upgrade our selling effort. At the end of the June 2010 fiscal year, we signed a contract, to commence in July 2010, with a sales training company. The trainers are implementing a fully program of sales training for our marketing staff. As a result, we paid $39,000 for sales training in the three months ended December 31, 2010 and $89,000 for sales training in the six months ended December 31, 2010.

              General and administrative expenses also increased sharply in both periods, showing a 35% ($52,339) increase in the three months ended December 31, 2010 and a 274% ($768,201) increase in the three months ended December 31, 2010. The cause of the increases was stock compensation given to our employees to incentivize them. On September 2, 2010, our Chairman, Kun Liu, transferred 313,500 of his shares to our employees. He also transferred 25,000 shares to another member of our board of directors, and 20,000 shares to our U.S. securities attorneys. Because these transfers were made for the benefit of the Company, we account for them as if the Company had issued the shares. Accordingly, we recorded a compensation expense of $526,615, the market value of the shares, in the first quarter of fiscal 2011.

              We also issued 1,500,000 shares to six of our most important employees in October 2010. The shares vest over a five year period, and we will recognize the expense related to the shares over that period. During the quarter ended December 31, 2010 we expensed $190,385 as a result of the October grant; at the end of the quarter there remains $1,459,615 in value that will be expensed over the remaining vesting terms.

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              As a result of the increase in our operating expenses during the recent periods, the 22% increase in our revenue from the second quarter of fiscal 2010 to the second quarter of fiscal 2011 yielded only a 20% increase in net income: from $677,599 in the three months ended December 31, 2009 to $812,900 in the three months ended December 31, 2010, and our net income fell by 28% from the first half of fiscal 2010 to the first half of fiscal 2011. Since the decline was attributable to the $526,615 stock-based compensation expense in the first quarter, an event that we do not plan to replicate, we expect that in the future our net income will grow as our revenues grow.

              The functional currency of our subsidiaries and affiliate operating in the PRC is the RMB. The financial statements of our subsidiaries and affiliate are translated into U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange (for the year) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $103,284 and $201,969 during the three and six months ended December 31, 2010, as compared to $139 and $35,562 during the three and six months ended December 31, 2009. This non-cash gain increased our reported comprehensive income.

LIQUIDITY AND CAPITAL RESOURCES


              During the first six months of fiscal 2011, our working capital increased by $1,918,604 to $7,074,868 at December 31, 2010. The increase was approximately equal to our net income for the six month period plus the $717,000 stock-based compensation expense that we incurred. The two components of working capital that made the largest increases were:

Accounts receivable, which increased by $870,290. The increase was primarily attributable to the 22% increase in our second quarter sales volume. In addition, we re-evaluated our accounts receivable at December 31, 2010 and determined that the $147,022 allowance for doubtful accounts that we recorded at June 30, 2010 could be reversed, as we had no accounts that were older than 90 days at December 31, 2010 and all accounts appeared likely to be paid on time. It should be noted that the program we had initiated in fiscal 2010 of allowing new customers extended payment terms has resulted in no accounts that are older than would be allowable under our customary payment terms.
   
Inventory, which increased by $436,189. The increase reflects our higher level of operations, as $414,370 of the increase consisted of work in progress and finished goods. Our raw material inventory did not rise significantly, reflecting the effect of the ABC inventory management system that we implemented earlier in the year. Under that system, we classify the components used for our products by availability and price sensitivity. We maintain low or no inventories of commonly available components and purchased them as needed. On the other hand, we purchased components with long delivery cycles when prices appeared low, and kept them in stock to assure availability. The initial result of this program was a significant reduction in our raw materials inventory. We expect our raw materials inventory will maintain at its current level in the near future, while our work in progress and finished goods inventory will grow in proportion to our sales growth.


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              Despite net income of $905,410 for the six months ended December 31, 2010 (which was reduced by a non-cash stock-based compensation expense of $717,000), our operations provided us only $69,882 in cash. The primary reasons for the discrepancy were the increases in accounts receivable and inventory discussed above. In addition, we used $513,125 in cash to reduce our accounts and taxes payable. In other words, this low cash yield from operations was a result of management allocation of resources, and is not indicative of the liquidity of our operations. During the year ended June 30, 2010, our operations provided us $2,728,015 in cash, including $891,097 in the first half of that year. We expect that for the forseeable future, our operations will provide us significant cash yield.

               Our working capital is nearly double our annual operating expenses, and our operations are cash-positive. With these resources, we expect that we will be able to fund the implementation of our business plan for the forseeable future.

FOREIGN EXCHANGE EXPOSURE


              Our sales are denominated in RMB and US dollars whilesour purchases and operating expenses are mostly denominated in RMB. As such, we may be exposed to any significant transactional foreign exchange exposure for our operations. However, to the extent that we may enter into transactions in currencies other than RMB in future, particularly as we penetrate into overseas markets, our financial results may be subject to fluctuations between those foreign currencies and RMB.

              On July 21, 2005, the RMB was unpegged against the US dollars and pegged against a basket of currencies on a "managed-float currency regime". As at December 31, 2010, the exchange rate was approximately US$1.00 to RMB6.5920 for the balance sheet, and US$1.00 to RMB6.6489 for the statement of income and other comprehensive income, respectively. There is no assurance that the PRC's foreign exchange policy will not be further altered. In the event that the PRC's policy is altered, significant fluctuations in the exchange rates of RMB against US dollars may arise. As a result, we will be subject to significant foreign exchange exposure. In the event that we incur foreign exchange losses, our financial performance will be adversely affected.

              We do not have a formal hedging policy with respect to our foreign exchange exposure as our foreign exchange gains/ losses for the periods under review have been relatively insignificant. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material foreign exchange exposure should the need arise. Should we enter into any hedging transaction in the future, such transaction shall be subject to review by our board of directors. In addition, should we establish any formal hedging policy in the future, such policy shall be subject to review and approval by our board prior to implementation.


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INFLATION

During the periods under review, inflation did not have a material impact on our financial performance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk


A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures.

              The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective. The weaknesses in the Company's controls and procedures consisted of (a) a lack of expertise in identifying and addressing accounting issues under U.S. Generally Accepted Accounting Principles among the personnel in the Company's accounting department, which has resulted in certain errors in accounting identified in Note 14 to the Consolidated Financial Statements, (b) a lack of expertise among Company personnel with regard to the disclosure requirements arising under the Rules of the Securities and Exchange Commission, and (c) inadequate review by management personnel of the Company's reports prior to filing.

Changes in Internal Control Over Financial Reporting.

              During the three months ended December 31, 2010, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party.

Item 1A. Risk Factors


A smaller reporting company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


On October 14, 2010, the Company issued 1,500,000 shares of common stock to six of its employees. The shares were issued in consideration of services, and were valued at the market value on the date of grant. The sale of the securities was exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933, by reason of the fact that there was no general solicitation in connection with the offering, and the fact that the purchasers had sufficient knowledge and experience to be capable of evaluating the merits and risks of the investment, and were purchasing for investment for their own accounts. There was no underwriter.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Removed and Reserved

Item 5. Other Information


None

Item 6. Exhibits


31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

  PI SERVICES, INC.
     
     
DATE: February 22, 2011 By: /s/ Kun Liu                                       
    Kun Liu, Chairman and Chief Executive Officer
(Principal Executive Officer)
     
     
  By: /s/ Chunping Fang                          
    Chunping Fang, Chief Financial Officer
(Principal Financial Officer, Principal Accounting Officer)
     



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